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GOP Tax Plan Could Spur More Int'l Investment in South Fla.

November 22, 2017

The Republican tax plan currently making its way through Congress could be a mixed bag for South Florida, according to experts who say the corporate tax cut could boost international investment, while a provision reducing the credit for renovating landmark buildings could hit the area’s historic districts hard.

The centerpiece of both pieces of legislation currently making their way through the two houses of Congress is a cut of the corporate tax rate from 35 to 20 percent. The U.S. House of Representatives passed one version of the bill last week, while another version has made it out of committee in the U.S. Senate and is headed for a full-chamber vote soon.

Because the corporation is a popular vehicle for foreigners to invest in South Florida projects, Alan Lips of Gerson Preston Klein Lips Eisenberg Gelber said the reduced rate could bolster investment from abroad, which already funds much of the development in Miami and its surrounding areas.

“We deal with so many international investors, and so many use corporations as their vehicles,” he said. “If they’re going to get a cut, it’s a massive advantage. It will trigger more investment from the outside.”

Real estate is the natural place where most of these investors will park their money, because it’s seen as a safe investment, he said.

“They aren’t looking for big returns,” Lips said. “They’re looking for protection for their money and the value of their money. With significantly reduced income tax rates, they can invest more.”

Lips added though that from the individual American investor’s perspective, the bill hits local homeowners hard due to proposed caps of $500,000 on the mortgage interest deduction and $10,000 on the real estate tax deduction. In South Florida, where home prices are frequently above that limit and property taxes can be high, that will hurt investors, he said.

“In markets like South Florida, it’s meaningful, because prices of real estate here are significant,” he said.

The repeal of the estate tax, which is also a feature of both the House and Senate bills, would benefit the many high-net-worth individuals who have been flocking to Florida over the years to take advantage of the state’s low tax rates, while also potentially creating a boom in the high-end real estate market, according to Louis Conti, a tax partner at Holland & Knight LLP.

While corporations will see a big tax cut, pass-through entities won’t see as much relief, and they outnumber C corporations in South Florida by a large margin, according to Miguel Farra, chairman of the tax and accounting department at accounting firm Morrison Brown Argiz & Farra LLC. In a C corporation, the company is taxed separately from its owners, while in pass-through entities like sole proprietorships or limited liability companies, the profits pass to the owners, who are then taxed on an individual basis.

For pass-through companies, the Senate bill offers a 17.4 percent deduction for qualifying business income, while the House bill imposes a 25 percent tax, with some restrictions.

He pointed out that South Florida has few major companies headquartered there, aside from the cruise lines. Much of the business in the area is conducted by owner-operated entrepreneurial companies, many of which are quite large, he said. Real estate developers, for example, are often organized as pass-through entities, according to Farra.

“It’s just the nature of the industries we have here in South Florida that they are prone to being flow-through entities,” Farra said.

The legislation benefits companies in the stock exchange, he said, but not the types of entrepreneurial businesses that are common in the state. He said that if the plan were to pass, it would not be difficult to reorganize as a privately held C corporation to take advantage of the lower corporate tax rate, but at some point, these companies will be taxed again when they pay out dividends.

“You may pay fewer taxes now, but there’s going to be a day when you have to pay the piper,” Farra said. “When you sell the company or its assets, you’ll be subject to double taxation then.”

Conti said LLCs currently outnumber corporations in the state by nearly a three-to-one margin. Large pass-throughs with owners taxed at the highest rate of 39.6 percent will see some relief, but owners of smaller companies, who may have been paying at a lower rate, may see their rate go up to 25 percent for pass-through income, he said.

“If the law changes, folks may start forming corporations as small businesses again,” he said. “Once we see final legislation as it’s enacted, it’ll be easy for tax lawyers to tell their clients what works best for their business.”

Another measure that local real estate developers and preservationists are watching is a cut to the tax credit given to those who save and redevelop historic buildings. The House plan gets rid of the tax relief entirely, while the Senate bill cuts it in half.

The tax credit, which was implemented in 1981, is a critical tool in the preservation of various historic districts in the state, including the Art Deco District on Miami Beach, according to Melissa Wyllie, the executive director of the Florida Trust for Historic Preservation.

The tax credit is currently for a percentage of the qualified rehabilitation expenses, and for a project to qualify, the building in question needs to be listed on the National Register of Historic Places.

Between 2002 and 2015, approximately 45 projects in South Florida received the tax credit. The majority were Miami Beach properties, including the largest project, a $317 million renovation of the landmark Fontainebleau Hotel in 2009.

Wyllie said that when her organization speaks with developers about a project on a building with historic significance, they tell her a project has to make financial sense, and that restoring an older building is often more expensive than tearing it down and building something new. The tax credit helps developers make restoration feasible economically, according to Wyllie.

“It levels the playing field for the economic feasibility of historic projects,” she said. “Because of that, it’s very important. We don’t want to just save the shell of the buildings — we want to save the communities and strengthen them.”

MBAF Certified Public Accountants LLP trading as MBAF Certified Public Accounts, LLP is a member of the global network of Baker Tilly International ltd., the members of which are separate and independent legal entities.

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